TRENDING

Flow-down clause can be a slippery slope

By Joseph J. Petrillo

Jul 09, 2004

Joseph J. Petrillo

In more than three decades, I have worked on many federal subcontracts, for both prime contractors and subs, and I've seen some odd things.

One common subcontracting technique is a catch-all flow-down clause, which incorporates, by reference, prime-contract clauses. This flow-down clause usually redefines 'government' as 'prime contractor' and 'contractor' as 'subcontractor.' Such clauses are convenient, and probably have saved a forest of trees.

Used wantonly, however, flow-down clauses can make mischief. For instance, the parties might simply dump all the prime-contract clauses into the list, whether or not they ought to be in the subcontract. As a result, the subcontractor might end up having to live with clauses that shouldn't apply to it at all.

Another set of problems comes from the substitution of the prime contractor for the government and the subcontractor for the contractor. A peculiar result is that the subcontractor could bestow upon the prime contractor the broad'and unneeded'audit rights of the comptroller general. Or, the sub may give the prime contractor 'unlimited rights' to the sub's intellectual property, when all that's required is for the government to get those rights.

A common unintended consequence of redefining terms is that the prime contractor acquires the government's broad power to terminate the contract for its convenience. Although the government rarely terminates a contract for convenience, it usually insists on the power to do so. If the prime contract gets terminated for convenience, the subcontractor should have to accept the same consequences'most notably, having to forgo anticipated profits.

Termination

But if the prime contract isn't terminated for convenience, there is no particular reason why the prime contractor should be able to terminate the subcontract for its convenience. Simply redefining the terms and incorporating the termination clause can yield this drastic result.

Another way subcontracts can suffer an early demise is through the options clause. When spending annual appropriations from Congress, the executive branch divides its multiyear contracts into a series of one-year terms, each of which is optional. If the government doesn't exercise an option, the contract ends. Subcontracts need to be clear about whether the prime contractor must continue the subcontract if the government exercises an option, or if the prime is free to go elsewhere.

As people who are active in this business should know, there are relaxed rules for commercial-item subcontracts. Time and again, however, I have seen primes ignoring these rules. Many of the usual flow-down clauses don't apply if the subcontract is for a commercial item, but they show up anyway.

Some of the most experienced primes are guilty of this. They simply trot out their usual voluminous subcontract forms, when an abbreviated version is all that's needed. (One may hear the excuse that a government-approved purchasing system mandates the use of such a form. If so, the prime still has the option of updating its purchasing system.)

At the other end of the spectrum is the infrequent subcontractor that simply wants to use its commercial purchase order form. Like it or not, there are requirements imposed by law that the sub must shoulder. And the government can do all sorts of things that cost its contractors money. When that happens, the prime has no choice but to pursue the claims-and-disputes process in its contract. If the problem is truly one caused by the government, the sub should participate in that process as well and accept its outcome.

So it's a mistake to treat a subcontract as just another deal between private companies.

Joseph J. Petrillo is a lawyer with the Washington law firm of Petrillo & Powell. E-mail him at jp@petrillopowell.com.